3

The Vanguard Target Retirement 2025 Fund (VTTVX) says it has approx. 65% of assets in stock and 35% in bonds and had a YTD return of 12.46% (As of 8/30/19)

The Vanguard Target Retirement 2055 Fund (VFFVX) says it has approx. 90% of assets in stock and 10% in bonds and had a YTD return of 13.69% (As of 8/30/19)

Thats a difference of only 1.23%. With the stock market doing as well as it is, I would have assumed that having 25% more in stocks would make the difference in the returns much larger.

How is the fund with a much larger percentage in bonds able to keep up with the other fund?

My only thought is perhaps the bonds were purchased 20+ years ago and are giving much higher rate. Would that even make sense?

  • 5
    Think of it this way instead: 13.69 is 9.9% higher than 12.46. – RonJohn Sep 4 at 4:34
  • A single year 1.23% different looks small, over 5 years, it is 6.15% difference. – mootmoot Sep 4 at 9:29
  • If the portfolio composition and weighting is the same then a difference of 1.23% between these two funds implies an annual return of something around 6 to 7 pct. Check your YTD returns for these two funds. – Bob Baerker Sep 4 at 14:26
  • @mootmoot - It's a question of YTD performance not how much the difference will amount to, compounded over multiple years. – Bob Baerker Sep 4 at 14:28
1

US Investment-Grade Bonds have averaged about a 5.3% return over the last 10 years, but this year the return has been about 13%, so the YTD numbers you're looking at include a higher-than-average performance period for bonds. I would expect the difference to be a little more pronounced if you look at a longer time period. Even then, a 2025 target fund still has a 5-year investment horizon, so it can afford to be a little more risky, and the difference won't be dramatic.

Remember that these target funds aren't necessarily built to outperform the market; they're built to give you returns with a level of risk appropriate to your investment horizon ("set it and forget it"). If you want to be more active in your fund selection you can probably find funds with better historical returns.

My only thought is perhaps the bonds were purchased 20+ years ago and are giving much higher rate. Would that even make sense?

Highly unlikely, because funds buy and sell bonds all the time to rebalance and manage risk (and most bonds do not last 20+ years).

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.